Magellan has begun positioning its $7.3 billion Global portfolio for a recession, which it believes is a likely scenario.
In a webinar, co-managers Arvid Streimann and Nikki Thomas said the Magellan Global fund had been avoiding financials and cyclical equities with a recession in mind.
Only one financial stock, Intercontinental Exchange, sat in its top 10 holdings.
Thomas said: “We are going to see a recession, it seems; is it a bad recession or a mild one? The markets are still pricing in a relatively mild recession, and, at this point, that still seems like a sensible scenario. But if it is worse than that, then you don’t want to be in financials or cyclicals.
“We feel as we play out the risks in front of us that we are in pretty good shape to navigate this without too much risk to the downside, which is a really important part of what we are trying to do.”
This compared to a year ago, when the fund had bought two positions in Lloyds Banking Group in the UK and US Bancorp in the US as it felt banks could increase their profits during an interest rate hiking cycle. In March 2022, US Bancorp had a 2.3 per cent weighting and Lloyds had a 0.9 per cent position.
“At the very early stages of the interest rate hiking cycle, these banks can actually increase their profits and that’s exactly why a year ago, we put two banks into our portfolio,” said Streimann.
However, as at December 2022, Lloyds had been removed, although US Bancorp was still a 2.6 per cent holding.
“Towards the end of an interest rate hiking cycle when interest rates are a bit higher … these banks don’t benefit so much and can actually become a little bit of a negative, which is why Lloyds was taken out of the portfolio at the latter stages of last year.”
The banking sector had also been hit with two scandals in the form of the collapse of Silicon Valley Bank in the US and Credit Suisse in Europe, which was later taken over by UBS.
Research by Bank of America in April found global fund managers had been moving their equity exposures into defensive sectors such as utilities, consumer staples and healthcare at the expense of banks and materials.
Streimann added that the pair were happy with the fund’s current construction and asset allocation as it had been able to avoid the unattractive banking areas and benefit from other areas, such as the re-opening of China. The fund held a 5 per cent weighting to China, based on the source of revenue.
“The things that we talked about which are less attractive at the moment — the banking sector where maybe more things will occur. We have a very small position to the banking sector in the portfolio and then some other things are more positive, [such as the] re-opening of China and maybe more broadly the re-opening of East Asia.
“We’ve got some nice exposures there via Western-based quality companies which play on that thematic and they’re both high conviction, so the positioning is really attractive at the moment.”
